heck, I'm happy to have the discussion-I've always had my 'feelings' about things like video conversion and it is interesting to hear the opinions of others.
As far as the native resolution on LCD monitors vs a projector I think you are safe-but again, I'm not sure. Using other than the native resolution on an LCD looks bad because of how the image is displayed. It has a little widget for each pixel on the screen-so if you run in a differet resolution it has to scale the image appropriately. I don't think that projectors have to do this-I use them at work and so long as you don't go beyond the native resolution the image always looks accurate to me.
What you experienced on the LCD though might help show my point. The LCD has to take an insufficient amount of data to fill its screen when you run in a lower resolution. The same will be true when the receiver takes your 480i input from the PS2 and tries to turn it into a 720p output on the TV. The problem hopefully won't be as bad as the LCD-but, and I've never tried this and I will be soon, if the receiver takes a 4:3 image and stretches it to 16:9 to acheive 720p then the picture will not be accurate unless the game supports a widescreen video mode. Hopefully the receivers have a way to switch between 4:3 and 16:9 or I'm probably not going to be happy with the conversion.
I'll be going through this in a couple of weeks. I'd try it out now but all my spare cables are packed up for the move. I'll post back on how it goes.
